HG Markets

OPEC's Strategy And The Battle For Oil Prices


Harvest Global Markets :

Saudi Arabia has announced an extension of its voluntary 1 million barrels per day (bpd) production cut through August. Recent statements from OPEC and Saudi Arabia’s energy minister, Prince Abdulaziz bin Salman, indicate that Asia’s robust economic growth, particularly in China and India, will drive the majority of oil demand this year. However, the long-term uncertainties surrounding China’s economic recovery and the diversification of its oil consumption raise questions about the validity of these predictions. It appears that OPEC, led by Saudi Arabia, is preparing for potential future cuts in oil production to support prices, in anticipation of demand not meeting expectations. This article examines the underlying dynamics in the oil market and the strategies employed by OPEC and its allies, contrasting them with the interests of the United States and its allies.

OPEC and Saudi Arabia are recognizing the potential for an economic rebound in China and India, which could drive oil demand growth. However, China’s (54%) oil consumption relies less on transportation compared to the US (72%) and EU (68%), limiting the potential for a significant surge in oil prices. Additionally, China’s discounted oil imports from countries like Russia, Iran, and Iraq further dampen the price increase prospects. In response, OPEC and Saudi Arabia are preparing for future production cuts to support prices if expected demand falls short. Their proactive and pre-emptive approach aims to ensure sufficient oil supplies during sudden spikes in demand and align with the transition to cleaner energy sources. Saudi Arabia’s fiscal breakeven oil price of $78 per barrel of Brent in 2023 is merely the minimum required to meet expected spending needs. However, the country’s true fiscal breakeven oil price surpasses this figure due to its significant real-world spending, which fluctuates unpredictably. This variability has deterred notable Western buyers from investing in Saudi projects, as observed during the failed initial public offering of Saudi Aramco. While OPEC and Saudi Arabia aim for higher oil prices, the United States and its allies, who are net oil and gas importers, strive to keep prices lower. Sustained high oil prices lead to inflation, higher interest rates, and economic damage for these countries. The U.S. is particularly concerned about the impact of a recession on presidential re-election chances. To protect its shale oil producers, maintain consumer spending, and avoid a recession before elections, the U.S. enforces a price range for Brent crude oil between $40 and $45 per barrel (floor) and $75 to $80 per barrel (ceiling). Currently, the U.S. is not overly concerned about Russia’s actions or Iran’s oil sales, as these contribute to lowering global oil prices, which aligns with their goal of price stability.

The statements from OPEC, Saudi Arabia, and the U.S. highlight the divergent interests and strategies at play in the oil market. OPEC is positioning itself for potential production cuts to support prices, anticipating demand uncertainties in Asian economies. Conversely, the U.S. and its allies seek to maintain a price range that balances the interests of their economies, oil producers, and political stability. As the battle for oil prices continues, these contrasting approaches will shape the future trajectory of the global oil market.


Share this post